Dr. Clinton's Prescription : A Health Plan in Need of Second Opinions

Gregg Easterbrook is a contributing editor to Newsweek and the Atlantic Monthly. His book on understanding the historical significance of environmental issues, "A Moment on the Earth," will be published next year by Viking Penguin

Certain categories of ideas draw easy criticism. Nearly anyone can knock a hole in any proposal for reform of intractable problems such as crime, racial prejudice, the decline of public education--or the travails of the health- care system. No matter who was put in charge of President Bill Clinton's health-care reform effort, no matter what Clinton proposed, people would now be complaining.

That being said: Clinton's proposed health-care reform has the potential to become a fiasco, with a capital Ffffffffffffttttttttttttttt.

Clinton's plan has many thoughtful features, including universal access to care, standard insurance policies available to all regardless of pre-existing conditions and a national health board to set basic therapeutic guidelines for doctors and hospitals. But the plan also has the potential to make an utter mess of U.S. health care, while raising prices in the process. Let's run through just the highlights of the plan's many faults.

* Still more bureaucracy. In the name of cutting bureaucratic waste, Clinton proposes to abolish nothing, while creating a new level of overhead in the form of large health-purchasing alliances; establishing the new national health board, and creating as many as 50 separate new theories of health care, since each state is to be free to devise its own.

Excessive overhead costs are already the leading objection to the American approach to medicine, with most studies estimating administrative expenses as consuming around 20% of U.S. health-care costs. This is far higher than in any other industrial nation. Health-care spending in the United States was $838 billion in 1992, making the administrative cost alone, at 20%, a stunning $168 billion. Yet Clinton proposes new additions to bureaucracy to avoid what he seems most to dread, saying "no" to any organized interest group.

Establishing new layers of overhead is always easier for presidents than abolishing existing layers. But is there a single soul in America (other than, perhaps, presidential medical adviser Ira Magaziner) who believes the health-care system needs more overhead? Rather than cutting from any of the four existing medical hierarchies--physicians, hospitals, insurers and medical suppliers--Clinton would create a fifth major hierarchy, the health-purchasing alliances, on the quaint notion that somehow the alliances will persuade the existing hierarchies to surrender turf voluntarily.

* No mandatory prices. Contrary to the popular misconception, not all national health-care systems rely on government single-payer mechanisms. Germany, for example, has private insurers. But all successful national health-care systems--principally those in Canada, France, Germany and Sweden--employ government-set pricing for physician and hospital services. Government-set prices are the only proven means to control health costs.

Yet, instead of having the new national medical board publish set fees schedules, Clinton ventures into the untested idea of restrictions on insurance premiums, and the debatable notion of caps on future rates of growth. The latter is self-defeating because, if nothing else, caps on future rates of growth guarantee that medical prices will rise to whatever level the caps permit.

Because of the lack of government-set prices, physician, hospital and insurance lobbies may find their fortunes actually improve under the Clinton proposal. Suppose that, as Clinton proposes, there will be no nationally mandated physician fees, but will be universal coverage. This means uncompen-sated care for the poor--which most doctors today provide free either cheerfully or grudgingly--will suddenly become billable procedures, billed at the market rate, not a government-set rate. As a result, physician incomes will rise. Since about 15% of Americans, or 37 million people, today have no health insurance, and since the mean income for self-employed U.S. physicians is currently $170,000 a year, this part of the plan has a potential to increase physician mean incomes by 15%, to $196,000 annually.

* Naive ideas about competition. The United States already has, by a wide margin, the most competitive health-care system in the world. Yet, rather than face down medical-interest groups by establishing government-set fees, Clinton supposes that still more competition--more of what already backfires in actual use--will be a cure-all.

Consider this comparison. The United States invests about 20% of its health-care dollars in administrative overhead, versus about 10% in Canada, the country with the second-most expensive medicine per capita. That is: Today's free-market U.S. approach generates double the overhead costs of Canada's government-run approach. Nothing is better evidence of the fact that, in the health-care arena, market forces backfire.

Yet Clinton proposes still more competition. This belies an unwillingness to face something elemental about medical care: Market forces cannot work, no matter how cleverly the system is designed.

Market forces depend on price signals. The invisible hand cannot guide an industry toward efficiency unless it has, through price signals, a clear grasp of the benefit-cost ratios of competing allocations of resources. This works fine in sectors of the health-care industry where fungible goods are bought and sold: Hospital gowns or drugs with the same chemical formula, for example, are transacted under smoothly functioning, competitive market conditions. But the system breaks down when it comes to the cost-driving essence of medical care--physician and hospital services. In this arena, there is no relationship between the cost of service and its value.

Medicine is driven by situations where price-signal information is worthless. Consider that five top cardiovascular specialists, examining the same patient with blocked heart arteries, might come to five entirely different conclusions about what procedures are indicated: these different approaches priced anywhere from free (lifestyle and diet changes) to low-priced (lifestyle changes plus drugs) to medium-priced (angioplasty or heart catheterization) to extremely expensive (triple bypass).

On this range of price options, there is no consumer cross-check. It is impossible for the buyer (the patient) to know which purchase has the best benefit-cost ratio, unlike true free-market arenas, where the buyer can easily discern whether features are as advertised. From this situation--standard in medicine--emerges no usable price-signal information. This more than anything is why competition backfires in health care. Yet Clinton proposes more competition.

* The Medicare Magic Asterisk. When Ronald Reagan proposed his first federal budget, which included simultaneous defense-spending increases and tax cuts, Budget Director David A. Stockman made the deficit appear under control by incorporating a Magic Asterisk: a line claiming billions of dollars in unspecified cuts to be named later. We all know what happened to those cuts--and to the deficit.

Since the great crunch question of modern politics is cutting existing expenditures, one ought to be extremely suspicious of any program that, like Clinton's health-care reform, promises its savings in unspecified future reductions.

Indeed, it's disheartening that while Clinton projects Magic savings on Medicare for the future, he is increasing Medicare spending in the present. Clinton's recently enacted budget deal contains a broad array of increased Medicare expenses, such as surgeon's fees increased by up to 8%. That's right--while Clinton has been talking nonstop about lowering U.S. health-care costs, in practice, he has acted to increase those costs, a small complication that has been overlooked during the health-care debate.

Clinton's plan pinpoints reducing Medicare and Medicaid expenses because no new legislation might be required--this being the one portion of current health-care spending that the Administration has authority over. To set fees for medical services generally, Clinton would need new legislation; and the notion of asking Congress for such legislation is daunting to the White House.

But Clinton's instinct--to pursue cuts in Medicare and Medicaid while leaving most medical services market-priced--is exactly backward. Medicare physician and hospital prices, which generally run about 20% below what is charged to commercial insurers, ought to be the model for the new system.

Clinton ought to take the existing Medicare fee structure and extend it to all medical services. This would bring the best cost-control aspects of other national medical systems to the United States, while keeping our system privately administered.

* An all-new political error. Perhaps the most engaging aspect of Clinton's proposal is that it is impossible to analyze in ideological terms. The plan would be of great benefit to the poor and the working poor, ending the intolerable current situation where those most financially vulnerable have the least access to care. And the plan would benefit the well-to-do, such as physicians, by both raising their incomes and getting them off the hook for true health-care reform. Only the middle class will suffer, since the new health alliances will be able to make ends meet only by rationing care.

Thus the Clinton plan will help the lower class, which does not vote, and help the upper class, which did not vote for Clinton, while hurting the middle class, which elects presidents. In ideological terminology, there is no name for this. Clinton is on the verge of creating an entirely new category of political blunder.

The President verges on this new category of blunder because he wants to help the poor, which is admirable; fears offending the lobbying groups of the well-to-do, which is well less than admirable, and knows that any medical-service rationing imposed on the middle class will happen gradually, in an unfocused way that may not bear directly on his 1996 reelection prospects.

If there were no valid alternatives to the plan Clinton proposes, it would be welcome, given the moral necessity of universal care. But there are alternatives: variations on national health care that will reduce costs rather than increase them, avoid health-care rationing and keep the U.S. medical system private. It is not too late to get these ideas into the plan. Clinton's proposal is just the beginning of the health-care debate.

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